Plan Fiduciaries Liable for Mispriced ESOP Stock Purchase

A U.S. District Court judge has issued a judgment and order
requiring fiduciaries to pay more than $6.48 million to the two employee stock
ownership plans sponsored by Bruister and Associates Inc. (BAI).

BAI was a home-service provider that installed and serviced
satellite-television equipment for its sole client DirecTV. According to a
lawsuit filed by the U.S. Department of Labor in U.S. District Court for the
Southern District of Mississippi, during a three-year period, from December
2002 to December 2005, Herbert Bruister, the sole owner of BAI, sold 100% of
BAI’s shares to the plans for $24 million. In each instance, Bruister and Amy
Smith served as trustees to the plans and members of the BAI Board of
Directors. Jonda Henry served as trustee for the three purchases tried by the
Court.

According to court documents, Bruister, Smith and Henry, as
plan fiduciaries, engaged in prohibited transactions by causing the plans to
pay excessive prices for BAI stock purchased from Bruister. For each purchase,
the fiduciaries used flawed valuations prepared by Matthew Donnelly and his
firm, Business Appraisal Institute.

The court also found that the three fiduciaries breached
their duty of loyalty from start to finish. Additionally, Bruister and his
attorney David Johanson went so far as to fire the initial attorney
representing the plans because that attorney was too thorough. Moreover, the
court found that Bruister and Johanson exercised undue influence over
Donnelly’s valuations, and that as a result, Donnelly was not sufficiently
independent to provide valuations for the plans.

The court concluded that Bruister, Henry and Smith, in their
role as plan fiduciaries, failed to properly represent plan participants’
interests, and that they unreasonably relied on an appraiser who so obviously
lacked independence. The court reasoned, “An informed trustee would not have
remained idle while the seller communicated directly with the employee stock
ownership trust’s independent appraiser and financial advisor in an effort to elevate
the price at the participants’ expense.”

Although Johanson was not a fiduciary, the court found his
conduct worthy of comment because he was both the attorney for the seller and
structured each sale. The court noted that Johanson attempted to influence the
valuations in Bruister’s favor, and the testimony Johanson gave at trial did
not support his denials. The court even noted that Johanson coached Donnelly
during a break in his deposition to retract his testimony that Johanson
represented Bruister individually. “History rebuts Johanson’s suggestion that
he did not interfere with Donnelly’s valuations and raises doubts as to each of
the subject transactions,” the court said.

The
court’s order requires Bruister, Smith and Henry to jointly pay $4.5 million in
restitution to the plans and requires Bruister to pay an additional $1.98
million in prejudgment interest. The order also held Bruister Family LLC liable
with all defendants for $885,065 and jointly liable with Bruister for $390,604.